How A Congress-Sanctioned Tax Credit Rescued Q1 Earnings

Tyler Durden's picture

A 25-year-old research-and-development tax credit that was extended by Congress - following its expiration at the end of 2011 - lifted profits for many firms in the S&P 500 by over 10%. While top-line revenue growth was a damp squib, earnings grew a more robust 6.7% thanks, as the WSJ notes, in large part to this tax-credit's 'accounting' gains. This stock-market-saving tax-gimmick, however, is only for "big corporate America," since, "small firms aren't profitable enough to get the credit." Looking ahead, however, the unusual benefit from extension of the tax credit won't help corporate profits for the rest of this year as it is set to expire at the end of this year (having cost the taxpayer over $7 billion).

Via The Wall Street Journal,

Strong first-quarter corporate profits may not be quite as good as they look.

 

An analysis by The Wall Street Journal shows that the extension of a big tax credit quietly boosted the profits of dozens of companies. Under accounting rules, the companies reported a year's worth of benefits from the research-and-development tax credit in their first-quarter results, lifting profits for many of them by more than 10%.

 

...

 

...the S&P-500 companies also set aside 5.6% less money for taxes, and that helped their cumulative profits grow a robust 6.7%, the Journal found.

 

The biggest reason they took that action: the extension of the research credit and other tax breaks in January.

 

...

 

The following tables gives some idea of the order of magnitude savings

 

[Intel] said the "substantial majority" of the decline stemmed from extension of the research credit. If Intel's profits had been taxed at last year's rate, it would have set aside an additional $290 million.

 

...

 

The previous extension expired at the end of 2011, meaning that companies couldn't claim the credit last year. That quietly increased tax rates—and hurt earnings—last year. Under the measure approved in January, the research credit will again expire at the end of this year, raising the prospect of future distortions in corporate earnings.

 

...

 

"It's big corporate America," Ms. Rao said of the beneficiaries. "Small firms aren't profitable enough to get the credit."

 

...

 

It's unclear how well investors anticipated the additional tax benefits.

 

...

 

Looking ahead, the unusual benefit from extension of the tax credit won't help corporate profits for the rest of this year. "The effective tax rate we saw in the first quarter is not representative of what we'll see in the rest of the year,"

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Dareconomics's picture

Eventually, the market will catch up to earnings. Will a big corporate tax loophole really be allowed to expire this year?

http://dareconomics.wordpress.com/2013/06/14/around-the-globe-06-14-2013/

Joe Davola's picture

Keep up the research Mattel - Barbie's DDDs need help standing firm against gravity!

El Viejo's picture

Another Top Down Magical Construct built upon Quicksand.

Corporations are loaded with cash.

How about a tax break for those who are part of the Demand side??

Oh that would be a moral hazard. I see.  Well, what about the moral hazard of raping and pillaging through finance???

NotApplicable's picture

Yay, Congress!

Now, about MY tax credits...

dcohen's picture

My fellow citizens, another hackneyed propaganda piece for arming the rebels with heavy weapons, from Zionist Warmonger Jeffrey Goldberg on Bloomberg

http://www.bloomberg.com/news/2013-06-14/five-depressing-thoughts-about-arming-syria-s-rebels.html

ZeroHedgers, destroy it intellectually now my.

Clycntct's picture

You misspelled it. It's Bombmerg

the not so mighty maximiza's picture

Thank  Allah they created so many jobs with those savings.

Rick64's picture

They probably did create thousands of jobs in Asia.

B2u's picture

I want a tax credit.  How about giving everyone a credit of $50,000. 

TheEdelman's picture

Bernank can fart 7bn (on demand).  

But the point is, all earnings are yet again, lehman-bernanke adjusted.

dognamedabu's picture

Good article but I take exception with a tax cut costing people anything. A tax cut saves people money.

spooz's picture

Right.  And after Citizens United, we can include Google and Boeing as "people" too.  Nice.

pragmatic hobo's picture

gee ... I wonder what kind of "research" by Mattel qualified them for the tax cut.

kchrisc's picture

Now the fascist cons of Congress are directly involved in the ACCOUNTING fraud of companies. How funny is that?!

"...the land of the free and the home of the brave" LOL

spooz's picture

Whats ludicrous is that full years tax credit taken in the first quarter is for retroactive to 2012 R&D along with 2013 Q1.  How exactly is giving back the expired credit for 2012 expenses in 2013 an incentive to R&D activity? Just another tax breaks for the big players.

Jim B's picture

It pays to have lobbyists that can buy you a tax break!

Shizzmoney's picture

Keep this article on a bookmark....and make sure to show it to any "progressive" or "conservative" next time they argue to you that *their* president didn't raise taxes on regular folk.

When taxes are cut from corporations, that money comes from somewhere.  And I'm gonna let you know right now - it AIN'T from AAPL, JPM, GS, GOOG, or any other big firms' pocket.

Rick64's picture

 Corporations and Banks write the laws and our dirty politicians pass them without reading or understanding them, while you pay their salaries and benefits. Talk about gaming the system (don't forget about bribes and future employment).